Surprise, surprise - Measuring firm-level investment innovations

Using the IFO Investment Survey for the German manufacturing sector, we construct a forty-year panel of firm-level investment innovations (surprises). We document the cross-sectional and time-series properties of this panel, and our main findings are: the cross-sectional dispersion of investment surprises is countercyclical, as is their average within-firm time series volatility, and both are highly correlated. This justifies, in part, strategies in the literature to use cross-sectional moments for the calibration of heteroscedasticity. At the same time, the cross-sectional dispersion of investment is procyclical, suggesting a nonsmooth capital adjustment friction at the micro level. There is substantial dispersion in within-firm volatility, a feature consistent with a recent literature on information frictions at the firm-level. Finally, the aforementioned second moments of investment innovations are Granger-caused by recessions, but not vice versa, rendering simple exogenous uncertainty shocks less plausible as drivers of business cycles.